What does a cash ratio of 0.1 mean?
Key Takeaways
In many cases, a company with a current ratio of less than 1.00 does not have the capital on hand to meet its short-term obligations if they were all due at once, while a current ratio greater than 1.00 indicates that the company has the financial resources to remain solvent in the short term.
Long-term debt is not included. A higher cash ratio indicates more liquidity to handle short-term debt. However, holding excessive cash can be inefficient if it sits idle rather than being reinvested in growth opportunities. Most analysts recommend a cash ratio between 0.2-0.5.
The five different types of quick ratios are: Acid Test Ratio - Current Assets/Current Liabilities = 1.3 (Sufficient) Cash Ratio - Current Cash/Current Liabilities = 0.1 (Insufficient)
A ratio above 1 is generally favored, while a ratio under 0.5 is considered risky as the entity has twice as much short-term debt compared to cash.
A current ratio of 0.2 to 1 means the company has only $0.20 of current assets for every $1 of current liability. This is an indication of the very bad/poor liquidity strength of the company.
If a company has a current ratio of less than one, it has fewer current assets than current liabilities. Creditors would consider the company a financial risk because it might not be able to easily pay down its short-term obligations.
Key Takeaways
If the cash ratio is less than 1, it shows an inability to use it to obtain more profits, or the market is saturating. If the cash ratio exceeds 1, the company has very high cash assets that cannot be used for profit-making business operations.
There is no ideal figure, but a cash ratio is considered good if it is between 0.5 and 1. For example, a company with $200,000 in cash and cash equivalents, and $150,000 in liabilities, will have a 1.33 cash ratio.
A: A higher cash ratio means that a company has more liquid capital available and lower short-term liabilities in need of payment, while a lower cash ratio means that there is a higher amount of liabilities and less cash on hand as an asset. Therefore, it is more desirable to have a higher cash ratio than a lower one.
What quick ratio is too low?
If a business's quick ratio is less than 1, it means it doesn't have enough quick assets to meet all its short-term obligations.
A quick ratio of 1 is sometimes recommended but will vary between industries. Anywhere between 0.3 and 0.6 can be considered a good debt ratio, depending on the industry.
Cash ratio is the measure of a company's liquidity. It indicates the company's ability to pay off its short-term debt obligations with its most liquid assets, which are cash and cash equivalents. It is primarily the ratio between the cash and cash equivalents of a company to its current liabilities.
A cash ratio below 0.5 is considered low. Companies with a low cash ratio may struggle with covering their short-term debts and have meager growth potential. Their efforts for expansion through research and development, mergers and acquisitions, or other means are limited.
For investors, the cash ratio can provide insights into a company's financial stability and its ability to weather financial downturns. A company with a high cash ratio is generally seen as a safer investment, as it is less likely to face financial distress or bankruptcy.
Common size analysis displays each line item of your financial statement as a percentage of a base figure to help you determine how your company is performing year over year, and compared to competitors. It also shows the impact of each line item on the overall revenue, cash flow or asset figures for your company.
Solvents, Co. is in a different position. The company's current ratio of 0.4 indicates an inadequate degree of liquidity, with only $0.40 of current assets available to cover every $1 of current liabilities.
A Current Ratio of 0.5 is not desirable for the firm because it means that they do not have enough current assets to cover the short-term obligations towards their creditors.
Generally, a Quick Ratio of 1.0 or greater is considered adequate to ensure a company's ability to pay its current obligations. A value of less than 1.0 signals a problem in meeting short-term obligations.
In general, a current ratio between 1.5 and 3 is considered healthy. Ratios lower than 1 usually indicate liquidity issues, while ratios over 3 can signal poor management of working capital.
What happens if current ratio is too low?
You'll want to consider the current ratio if you're investing in a company. When a company's current ratio is relatively low, it's a sign that the company may not be able to pay off its short-term debt when it comes due, which could hurt its credit ratings or even lead to bankruptcy.
Debt Ratio = 0.50, or 50%
A company that has a debt ratio at this level has a perfect balance in its debt and equity funding and would also be considered a low risk for a potential financing source.
A good current ratio is between 1.2 to 2, which means that the business has 2 times more current assets than liabilities to covers its debts. A current ratio below 1 means that the company doesn't have enough liquid assets to cover its short-term liabilities.
Generally, your current ratio shows the ability of your business to generate cash to meet its short-term obligations. A decline in this ratio can be attributable to an increase in short-term debt, a decrease in current assets, or a combination of both.
Current Ratio Definition
This ratio compares a company's current assets to its current liabilities, testing whether it sustainably balances assets, financing, and liabilities. Typically, the current ratio is used as a general metric of financial health since it shows a company's ability to pay off short-term debts.
